29.04.2019 – Special report. The Turkish central bank has apparently abandoned the support of the Turkish lira. Now it’s getting exciting for friends of technical analysis: USDTYR and EURTYR are showing signs of a cup formation. But those who are dead live longer if, for example, international allies lend Ankara fresh foreign exchange. Reason enough for an update on our Special Report from early of this month.
The Lira Weakens Again
Told you so: In our special report on the Turkish local elections at the end of March, we pointed out that Turkey might soon have to stop supporting its domestic lira. Since then, the currency has lost almost ten percent against the euro and the dollar. With the dollar, the lira is again close to the magic mark of 6 lira. This could only have been the beginning.
Is this the beginning of the capitulation?
The Turkish central bank (Türkiye Cumhuriyet Merkez Bankasi – TCMB) in its press release of 25 April on the key interest rate decision, according to the financial blog ZeroHedge, has refrained from a reaffirmation that it had always used before, according to which it would use “additional tightening” if necessary, i.e. could raise interest rates even further. Incidentally, the key interest rate remained unchanged at a staggering 24 percent. However, many analysts had just expected a warning about a possible further hike to support the currency.
It seems that Turkey can’t get a grasp on the fight against inflation. At around 20 percent, inflation is four times the monetary policy target. Here the Monetary Policy Committee has smoothed its language in the “forward guidance” and shown little determination.
According to ZeroHedge, investment bankers interpreted the recent development as the capitulation of the hawks in an attempt to support the Turkish exchange rate. The blog quoted Win Thin, the head of the global foreign exchange strategy of the US private bank Brown Brothers Harriman, as saying that the development in Turkey was far worse than expected – no central bank in the world could switch to the doves in times like these.
No more ammunition
Ankara is out of gunpowder, according to the news agency Bloomberg, the support of the lira cost Turkey between 10 and 15 billion dollars at the end of March alone. The “Financial Times” reported that TCMB’s foreign exchange reserves alone fell by 1.8 billion dollars last week. All this looks like a Waterloo for long investors in the lira.
We are curious whether allies like Russia will intervene to support the lira. Moscow and Ankara announced on 9th April the creation of a joint investment fund to be filled with the equivalent of 900 million euros. The caskets of the sheikhs in Qatar are also full to bursting.
Parallels to Russia
Now the Turkish government will probably soon start murmuring again about dark powers speculating against the domestic currency. But that is nonsense. A currency is always strong when investors flow into the country and exchange dollars or euros for local currencies to pay salaries locally and build factories. And when they flee in masses, then the national currency just disappears. Moreover, a currency always weakens when the estimated government instructs the not so independent central bank to print money to pay pensions, wages for soldiers or civil servants’ salaries.
The Russians can sing a song about it – at the turn of the millennium they only had to put 23 rubles on the counter of exchange offices for one euro when investors such as Ikea, international car companies or supermarket chains such as Carrefour or Metro discovered Russia. Then reports of corruption and bureaucratic obstacles became more frequent, the fight against Islamist terror in Chechnya cost a lot of money, and the price of oil fell again. In short, the economy weakened and the ruble crashed. At the peak of 2016 the figure was 89, currently it is 72 rubles per euro. You can imagine the joy of the Russian middle class at the loss of purchasing power from their savings, which is why real estate and gold are traditionally in high demand in the Russian Federation. The situation is hardly any different in Turkey, where military intervention in Syria has burdened the state budget and tourism has suffered as a result of the flow of refugees.
Cup with a handle
Meanwhile, chartists are watching as to whether the EURTYR and USDTYR might not form a gigantic cup-with-handle formation over the year, which would mean the lira falling into the bottomless if a breakout occurs. The upper left edge of the cup would therefore have formed in August 2018, the bottom this January.
So: No country in the world can forever support its own currency if the real economy is ailing. But: A crash does not have to happen, going long or short here, as so often, a question of politics. For example, the Turkish central bank could surprise investors and raise the key interest rate without warning. Or unexpectedly mobilise new currency reserves. Ankara must prevent a wave of bank and company bankruptcies, as many market players have gone into debt in dollars. A deep recession cannot be allowed by the government under any circumstances.
We are curious to see what happens next, the Bernstein Bank wishes you successful day with your trades. But please only with Germany’s best CFD brokers with a Bafin license!
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